California expands debt collection law to include commercial debt

On September 24, 2023, Governor Gavin Newsom signed SB-1286, which extends the California Rosenthal Fair Debt Collection Practices Act (California FDCPA) to certain commercial financial products. Lenders, service providers, and those who collect on their behalf – including attorneys – should pay careful attention to the requirements of the California FDCPA that may apply to some commercial debts in the future.

Scope, Licensing and Applicability

SB-1286 amends the California FDCPA, which applies to businesses that collect their own debts, to apply to “covered commercial debts” that are “completed, renewed, sold or assigned on or after July 1, 2025.” The legislation defines a “covered commercial debt” as “money due or owing or alleged to be due or owing by an individual to a lender, a commercial financing provider as defined in Section 22800 of the Finance Code, or a debt purchaser, as defined in Section 1788.50; due to one or more covered trade credit transactions.” A “covered trade credit transaction” is defined as “a transaction between one person and another person in which that person receives an aggregate value not exceeding five hundred thousand dollars (US$500,000) on credit from the other Person acquires primarily for use other than personal, family or domestic purposes.”

Structurally, SB 1286 amends the California FDCPA by replacing the term “consumer debt” with the term “covered” debt in many places throughout the law to apply various provisions of the law to commercial debt. For commercial debt, SB 1286 assesses the total debt of a commercial debtor and excludes the total commercial debt from its scope if the aggregate amount of all covered commercial credit transactions and all other uncovered commercial credit transactions due and owed by the debtor or other obligated person , applies within the scope of the transactions to the same lender, commercial finance provider or debt buyer is not more than $500,000.

The legislation itself specifically states that the bill is not intended to impose additional licensing requirements under the Debt Collection Licensing Act (DCLA).

Takeaways:

• Some commercial debts in California are eligible for consumer protections: Some commercial credit transactions under $500,000 are subject to procedural and substantive performance obligations that historically only applied to consumer credit transactions.
• Attorneys who conduct “commercial credit transactions” in California may be subject to the California FDCPA: Attorneys were previously exempt from compliance with the Rosenthal Act. This exemption was eliminated in 2019, making attorneys who collect consumer debts subject to the requirements of the Rosenthal Act. Attorneys conducting commercial credit transactions pursuant to SB 1286 must consider the applicability of their obligations under the Rosenthal Act.
• Accounts that are not in default may remain exempt from tax liability: The California Attorney General held in 2022 that the California FDCPA does not apply unless the obligation is “due and owing.” 85 Ops Cal Atty Gen 215 (2002) (debt is due or owing when it has “fallen into default thereby subjecting it to collection” and “current” credit obligations are not subject to the requirements of the Rosenthal Act). On its face, SB 1286 does not change the language of the California FDCPA, which forms the basis for the AG's opinion.
• Total commercial debts of more than $500,000 may trigger an exemption: “For example, a debtor who owes $400,000 on one loan and $200,000 on another loan from the same lender is not covered by this bill, since the total amount owed exceeds $500,000.” (SB 1286 Analysis, Senate Rules Committee, (August 9, 2024)).
• SB 1286 only applies to debtors who are “natural persons.” B-2-B business lending transactions that do not involve a borrower or a guarantor natural person remain exempt from SB 1286.
• SB 1286 does not require a new license under California's Debt Collection Licensing Act.
• SB 1286 applies only to covered transactions completed, renewed, sold, or assigned on or after July 1, 2025.

Do's and Don'ts Regarding Commercial Debt Under the California FDCPA

• Covered commercial debt lenders and servicers should be aware of the “consumer” protections under the California FDCPA that now apply to California small business financial products. Industry groups raised a number of concerns before the bill took effect because business debt and consumer debt are inherently different under the California FDCPA, which will likely lead to litigation over unresolved issues under the law.
• For example, industry groups highlighted that California Civil Code Section 1788.12(a) limits the manner in which a debt collector may communicate with a debtor's employer and also limits the manner in which a debt collector may communicate with persons other than debtors, such as family members and other third parties, parties may communicate. However, the employer itself is the debtor in a commercial debt transaction, and the debt collector may need to speak with employees of a company who are family members of the guarantor of the debt, or with accountants and bookkeepers, to facilitate settlement of the debt.
• Nonetheless, the California FDCPA extends a number of protections and limitations, many of which are adopted from the federal FDCPA, to debt collectors of covered commercial debts. Below is a list of some important “dos and don’ts” that are often the subject of debt collection actions and litigation.

DOS:

• Send a Confirmation of Debt Certification – If you are a third-party debt collector, send a confirmation letter describing the debtor's rights that accompanies the first written notice originally sent to a debtor's California address;
• Send Notice of Time-Barred Debt – A debt collector may not collect or attempt to collect a time-barred debt until it first sends a written notice containing a required disclosure pursuant to CC §1788.14(d);
• Understanding Identity Theft – When a debtor notifies a debt collector that the debtor is a victim of identity theft, the debt collector must cease collection activities and follow a set of prescribed procedures.

Don'ts:

• Communicate at certain times, in certain places, or in certain ways – A debt collector may not communicate with a debt at unusual or inconvenient times or in unusual or inconvenient locations, which are generally outside of the hours between 8 a.m. and 9 p.m. the debtor's local time or attempt to do so or at the debtor's workplace if the debt collector has reason to believe that the employer prohibits the debtor from receiving these communications at the workplace. Additionally, the debtor may indicate that certain communication times, locations, or methods are inconvenient, which the debt collector must respect. (Bus & PC §6077.5(c); CC §1788.17);
• Communicating with an Attorney-Represented Debtor – A debt collector may no longer communicate with a debtor once it receives written notice that the debtor is represented by an attorney;
• Harassment, Abuse, or Threats – Debt collectors may not use threats, violence, or other criminal means to collect debts. You may not use obscene or profane language or publish a “deadbeat” list;
• Call Restrictions – A debt collector may not allow a telephone to ring or engage in a repeated or continuous conversation with the intent to annoy, abuse, or harass anyone at the number called. Debt collection agencies are also not allowed to make telephone calls without meaningfully disclosing the identity of the caller;
• Make false and misleading statements – A debt collector must not use false, misleading or deceptive statements or devices in collecting a debt. This may include falsely implying that the debt collector is affiliated with a government agency; misrepresenting the nature, amount or legal status of the debt; or threats to take legal action or defame the debtor;
• Engaging in Unfair Practices – A debt collector must not use unfair or unscrupulous means to collect or attempt to collect a debt. Debt collectors should be cautious about their charging practices, as “unfair or unreasonable” includes collecting amounts that are not authorized by the agreement creating the debt or permitted by law (collectors are under scrutiny for “pay-to-pay”) /“convenience”) charge “fees,” which are fees charged to the debtor for making a payment in a particular manner, or other illegal fees not expressly permitted by law or by a written agreement with the debtor .

Diploma

Commercial lenders, service providers, and those who collect on their behalf should carefully review the requirements of SB-1286 and ensure that their practices comply with the California FDCPA.